Developments in electricity market in Turkey: Reform, performance and demand analysis

Many countries, in conjunction with the liberalization and privatization trends, have implemented the electricity market reform which covers of competition, regulation and privatization components in electricity supply industry particularly during the last two decades. In Turkey, some legislation to include the private participation into production and distribution segments of electricity supply have been implemented during the 1980-1990s. But the main progress in the electricity market aiming to develop a competitive market was initiated by Electricity Market Law (No:4628) in 2001.In this study, the effects of electricity market reform in electricity sector in Turkey was examined in two aspects. First, the performance of electricity sector was assessed by key indicators widely accepted in international literature such as reserve margin, price, investment, capacity utilization rates and profits. Second, economy wide effects of price changes (based on cost improvements) from electricity market reform and abolishment of cross subsidization between consumer groups and regions were analyzed. In this respect, electricity demand of the two major user segment was estimated. Reliable demand projection which includes economic variables is so important in terms of participation of demand side into market, ensuring the supply security and sustainability of regulations in electricity sector in reform process.In the context of electricity sector performance, although the experts in this field stated that the reserve margins were close to optimum, the reserve margin rates which means security of supply, there are some hints about these rates are still high. Though the theft and loss rates (especially in distribution segment) have been changing towards desired direction, the rates are still above the both OECD and world average. After the implementation of DUY (The Balancing and Reconciliation Law) investments started to increase in electricity sector in last two years but still the amount of investment is lower than desired level. The capacity utilization rates have decreased in both thermal and hydraulic power stations. The financial positions of the key institutions in electricity sector is weak and not stable. The cross subsidization in both among the regions and consumer groups still continue.In this study, the electricity demand of manufacturing sector which has the biggest share (%46.2) in electricity consumption was estimated by Translog Cost Function. The electricity demand of household which has the second biggest share in electricity consumption was estimated by panel data set consisting of 81 provincial level data for 1994-2001 periods. The Translog cost function estimation results indicate that electricity and capital production factors are complementary. This results suggest that price decreases due to electricity market reform will increase the employment. Since the electricity and raw materials are substitute inputs, the electricity price decrease will also reduce raw material using, so the raw material cost will become less and the competitiveness will increase in manufacturing sector. If the price of electricity decreases, the investments will substantially increase in the manufacturing sector. While the own price elasticity of electricity demand for manufacturing sector is close to unitary, electricity demand elasticity of household is low. Though the income elasticity for household is low, per capita income growth, increase of household number and urban population rate will encourage the residential electricity demand.